House Doctor: We've saved up a hefty deposit, so why can't we get a cheaper mortgage?

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Question: We're first-time buyers and have saved for nearly four years now, and have a chunky £25,000 deposit. So we can't believe there's nothing other than very steep mortgage interest rates available to us. If we buy a £250,000 flat with our loan-to-value at roughly 90 per cent, our bank won't give us anything better than 6.09 per cent. Base rate has been at 0.5 per cent for over a year now – is there anything better at all for us as customers? EE, Wilts

Answer: Not all first-time buyers are equal. As you've discovered, the loan you actually qualify for depends on one critical factor – the deposit. As Britain's housing market crawls gingerly ahead, the post- recession hangover is still a major headache for those first-timers without a sizeable sum to put down.

Where once a 10 per cent deposit unlocked the door to a reasonable rate, borrowers now routinely need at least 15 per cent, and ideally at least 20 per cent for competitive deals, warns Andrew Montlake at broker Coreco. "Lenders are understandably still anxious about first-timers buying a home with a small amount of equity," he says. First, your 10 per cent deposit exposes the lender to greater danger of negative equity if prices fall, and secondly "it costs the bank or building society more to lend you such sums because it must set aside more capital to protect itself," he adds.

Recent figures from the Council of Mortgage Lenders spell out the competitive challenge facing you. In March, first-time buyers borrowed an average of 76 per cent of the cost of their property. And tellingly, it was the first time that average deposits by first-time buyers had fallen below 25 per cent for more than a month since January 2009. For house-buyers borrowing at these levels, mortgage rates can be as low as 3 per cent to 3.5 per cent.

All of which leaves you and your 10 per cent facing comparatively formidable rates, says David Hollingworth at broker London & Country. "With a 10 per cent deposit, most rates tend to hover on average at around 6 per cent – although a new deal just launched by the Post Office offers a two-year fixed rate at 5.45 per cent, with a £999 fee." If it were possible to secure another £12,500, to take your deposit to 15 per cent – a loan from parents, perhaps, or by using any other savings – you'd suddenly find a whole new, cheaper world of mortgages opening up, Hollingworth adds. "You'd be able to look at rates such as a two-year fix at 4.29 per cent from the Post Office." Alternatively, if you shift your target price downwards you could turn your £25,000 into a 15 per cent deposit.